El Niño Alarms Prove to be False

AAPG's unofficial expert on the El Niño
phenomenon and its effect on natural gas prices says he does not
expect to see $10 gas prices again this year -- but he does anticipate
steady gas prices through this winter.

Michael Wilson, an AAPG member and consultant based
in Evergreen, Colo., first became interested in El Niño events during
1994, when he noticed that the 1994-95 El Niño coincided with a
mild winter, falling natural gas prices and a wave of layoffs and
mergers in Colorado's energy sector.

He discovered that similar events had occurred after
the 1991-92 El Niño, and wondered, "Why do El Niño events cause
so much stress for the gas business?"

Wilson then began collecting climate data from the
National Oceanic and Atmospheric Administration and the Center for
Ocean-Atmosphere Prediction Studies. He correlated climate data
with heating degree-day counts, Henry Hub spot gas prices, gas consumption
data and gas company earnings.

He sorted the data according to the three ENSO phases
(El Niño, Neutral and La Niña), and eventually found out why El
Niño events cause problems for the natural gas industry: They shift
the Pacific jet stream southward and bring warm winters to the Great
Lakes region.

"The Great Lakes region is the key to the central
U.S. gas market," Wilson said. "In a state-by-state breakout, you
can see that Illinois, Indiana, Pennsylvania, Minnesota, Michigan
and New York are major gas users. During mild winters, reduced demand
for heating fuels affects spot gas prices."

Extended reading

AAPG's unofficial expert on the El Niño
phenomenon and its effect on natural gas prices says he does not
expect to see $10 gas prices again this year -- but he does anticipate
steady gas prices through this winter.

Michael Wilson, an AAPG member and consultant based
in Evergreen, Colo., first became interested in El Niño events during
1994, when he noticed that the 1994-95 El Niño coincided with a
mild winter, falling natural gas prices and a wave of layoffs and
mergers in Colorado's energy sector.

He discovered that similar events had occurred after
the 1991-92 El Niño, and wondered, "Why do El Niño events cause
so much stress for the gas business?"

Wilson then began collecting climate data from the
National Oceanic and Atmospheric Administration and the Center for
Ocean-Atmosphere Prediction Studies. He correlated climate data
with heating degree-day counts, Henry Hub spot gas prices, gas consumption
data and gas company earnings.

He sorted the data according to the three ENSO phases
(El Niño, Neutral and La Niña), and eventually found out why El
Niño events cause problems for the natural gas industry: They shift
the Pacific jet stream southward and bring warm winters to the Great
Lakes region.

"The Great Lakes region is the key to the central
U.S. gas market," Wilson said. "In a state-by-state breakout, you
can see that Illinois, Indiana, Pennsylvania, Minnesota, Michigan
and New York are major gas users. During mild winters, reduced demand
for heating fuels affects spot gas prices."

Obviously, low spot prices hurt the profits of the
companies who sell gas into this market.

La Niña events also produce warm winters, but they
mainly affect the southeastern United States.

"During the cold phase, the jet stream shifts north
over Vancouver, and blows along the Canadian border," he said. "It
blocks the cold fronts and creates mild winters in the central and
southeastern United States. Recent La Niña events correlate with
weak gas prices and mediocre gas company profits.

"All in all, two out of three ENSO phases cause mild
winters and are bad for the gas business," Wilson said. "No wonder
the gas sector is so cyclical."

ENSO phases oscillate back and forth but aren't very
regular. Historically, the interval between one El Niño event and
the next is usually three to five years.

Looking back, there was a giant El Niño event during
the 1997-98 winter. Then temperatures in the Pacific Ocean cooled
down into a long-lasting La Niña phase, which continued through
the winters of 1998-99 and 1999-2000.

"We had three unusually mild winters in a row," Wilson
noted. "It was a long run of bad luck for the energy industry."

But sea surface temperatures in the central Pacific
finally came back to neutral a year ago -- and neutral phases have
been the best for the gas business. Wilson's correlations show that
neutral sea surface temperatures in the central Pacific correlate
with the coldest winters in the Chicago-Great Lakes region, the
highest Henry Hub spot gas prices and the highest gas company profits.

"I saw the neutral phase developing a year ago, and
decided to hold onto some drilling stocks I'd bought when prices
collapsed during the 1997-98 El Niño," he said. "Sure enough, those
drilling stocks went right back up along with oil and gas prices
-- $10 gas and $28 oil. I sold most of my drilling stocks in February
2001, just as gas prices peaked."

Sea surface temperatures in the central Pacific have
remained neutral during most of this year.

"But during July and August, a warm sea surface temperature
anomaly showed up between Panama and the Galapagos Islands," he
said. "NOAA put out a couple of warnings indicating that if the
warm anomaly continued to expand, we might have a mild El Niño during
the winter of 2001-2002."

Since then, however, the warm anomaly has receded
slightly.

"It was a false alarm," Wilson said. "Now it looks
very neutral out there in the central Pacific, and the temperatures
seem to have stabilized."

He noted that the Pacific jet stream has been wobbling
back and forth a lot recently, but several cold fronts have come
down into the central United States -- including one that triggered
snow in North Dakota a few weeks ago.

Wilson said that this winter could be unusually cold,
resulting in strong demand for heating fuels.

"On the flip side, the numbers coming in from the
gas storage facilities indicate high fill-up this year," he said,
so there's plenty of gas in storage."

California's electricity crisis has subsided, the
U.S. economy is in a downturn and oil prices have been falling.

"Manufacturing numbers are down and there are layoffs
and factory closings," he said. "Industrial demand may slump this
winter. I expect steady spot gas prices, but I don't expect to see
$10 again for quite a while."

"OPEC keeps shifting gears -- they're always a wild
card -- but the ENSO cycle goes on and on. The weather never stops."